Income Tax Brackets - Calculate Monthly Income Tax – Compute Income Tax Using Excel

Income tax is the annual tax levied on the financial income of people, corporations, or other legal entities. In many countries income tax is progressive on successive brackets of income, so that the more you earn the higher the incremental rates of tax you pay. Naturally, people do not like paying taxes but expect the government to provide services to them. Unfortunately, the taxation system is such that the just person will pay more and the unjust will pay less on the same amount of income, but when there is anything to be received from the government, the unjust person gains more.

Huge Interest Rates on Unpaid Amounts

If you think you can stay without paying taxes, then you are just complicating things for yourself. The tax authority may not catch you today, but when they do catch up with you, and they will anyway, then your mistake will cost you a lot of time, trouble, and huge money in penalties and could as well land you in jail. The bad thing with postponing payment of income tax is the huge interest rates on unpaid amounts which is compounded every three months or so. A small amount of $1000 that you fail to pay today may in seven years time have compounded to $10,000.

The best solution to income tax issues is to pay your tax on time every time you make an income. It is true there are many people who fill income tax returns but only about 10% fully understands how to arrive at the figures they fill in the income tax form returns. Now, the law says you must play the game of income tax. The tax authority understands very well how to compute the income tax. Because you are a player, do you fully understand how to calculate you income tax? Whilst the tax authority will ask you when you underpay, you yourself should be able to ask the tax authority for refunds when you overpay. If you do not understand how to compute your income tax, you ca not ask for your refund and you may be losing thousands of dollars every year to the tax authority.

Online Income Tax Calculators

Today, you will find online income tax calculators that will help you compute the income tax you need to pay by just inputting the amount of your income. But with or without online tax calculators, you need to understand how to compute your tax so that you can know when you have underpaid or overpaid. Take the example of an employee who earns a monthly salary of $6000 and pays an income tax of $1287 every month. If one month the employee gets arrears of an additional $2000, the situation can become very complicated in computing the amount of tax you need to pay in that particular month. If you don’t get it right and your employer does not get it right, then at the end of the year you may get unpaid taxes and if you do not check with the tax authority for the amount due, this amount may continue to generate compounded interest which may translates in huge tax penalties in just a few years.

You marginal income tax bracket depends upon your income and your tax-filing classification. As an example, in USA there are six tax brackets for ordinary income with rates ranging from 10% to 35% and four classifications namely: single, married filing jointly, married filing separately, and head of household as per the following table (year 2009):

Today, almost everybody has access to a computer and it would be helpful if one was to learn how to write a small program to compute your income tax using Excel.

Based on your income and your tax-filing classification, you would proceed as follows:

1. Input marginal rates into column A – 10% in A1, 15% in A2… and 35% in A6.

2. Input the lower margin of each of your tax bracket into column B – say 0 in B1, 8350 in B2… and 372950 in B6.

3. Input your income amount in column C – say 10000 in C1

4. Input the time period of your income in column D – 1 for one month, 2 for 2 months … and 12 for one year in D1.

5. Annualize your income by inputting the following formula in column E (row 1) “=C1*12/D1”

The following seven steps will be used to sort your income into various income tax brackets:

1. Input the following formula into column F (row 1) “=if(E1>B1,1,0)”

2. Input the following formula into column G (row 1) “=if(E1>B2,1,0)”

3. Input the following formula into column H (row 1) “=if(E1>B3,1,0)”

4. Input the following formula into column I (row 1) “=if(E1>B4,1,0)”

5. Input the following formula into column J (row 1) “=if(E1>B5,1,0)”

6. Input the following formula into column K (row 1) “=if(E1>B6,1,0)”

7. Input the following formula into column L (row 1) “=SUM(F1:K1)”

The next seven steps will be used to compute your income tax:

1. Input the following formula into column M (row 1) “=IF(L1=1,(E1*A1)*D1/12,0)”

2. Input the following formula into column N (row 1) “=IF(L1=2,((B2*A1)+E1-B2)*A2)*D1/12,0)”

3. Input the following formula into column O (row 1) “=IF(L1=3,((B2*A1)+(B3*A2)+(E1-B3)*A3)*D1/12,0)”

4. Input the following formula into column P (row 1) “=IF(L1=4,((B2*A1)+(B3*A2)+(B4*A3)+(E1-B4)*A4)*D1/12,0)”

5. Input the following formula into column Q (row 1) “=IF(L1=5,((B2*A1)+(B3*A2)+(B4*A3)+(B5*A4)+(E1-B5)*A5)*D1/12,0)”

6. Input the following formula into column R (row 1) “=IF(L1=6,((B2*A1)+(B3*A2)+(B4*A3)+(B5*A4)+(B6*A5)+(E1-B6)*A6)*D1/12,0)”

7. To get the Income Tax Payable, Input the following formula into column S (row 1) “=SUM(M1:R1)”

If you can understand this, then you can go ahead and rearrange your Excel spreadsheet in a neat manner so that any time you have an income tax problem you can refer to it. The marginal income tax bracket table can be obtained from your government tax department or tax authority. Whilst you are at the income tax department of your government check out for all allowed adjustments, deductions and exemptions which should be excluded from the taxable income. In some countries, employer-paid health insurance and interest from tax-exempt bonds are exempt from income tax and the amounts should be deducted from your income to get taxable income.

Now you have your amount of tax payable which you should expect to see in your monthly payslip or your cumulative annual tax slip provided by your employer. If the two amounts are not the same, then you have a reason to ask your tax authority or your employer to rectify the situation immediately. If you are a business person, you can find your monthly income and compute the appropriate income tax to pay to the government at the end of the month so that at the end of the year you do not have large amounts of tax to pay – to the extent of you taking a loan to pay your taxes.

Taxman Stealing From You

Check out your past tax records to see if the taxman has been stealing from you. If he has, ask for a refund immediately otherwise they may be using your money to feed the nation. On the other hand, pay your tax on time and fairly. Do not lose sight of the fact that the just citizen who pays all their taxes sees those who don’t pay their taxes as parasites in the society, even though they will never have the courage to face you and tell you that.

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